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Once you have decided to start your own business, one of the first important questions to consider is how you will structure your business. Usually, the most obvious way to do this is to operate as a sole trader. It is common for businesses to use the sole trader structure because it is simple to set up. However, it is important to consider whether it is appropriate for your current situation as well as your business goals in the future. This article sets out the main advantages and disadvantages to operating as a sole trader and the alternative business structures you may want to choose.

What is a Sole Trader?

A sole trader is a business run by an individual. If you set up as a sole trader, the law considers that you and your business are the same rather than separate entities. This means that you will completely own and control the business and receive all the income and profits from the business. However, this also means that you are solely responsible for all the debts of the business and are personally liable for income tax from the money your business earns.

How Do You Set Up as a Sole Trader?

Setting up your business as a sole trader is relatively straightforward. You can register for an ABN and use your individual TFN to trade. You will also need to register for GST if you expect that your income will be more than $75,000 per year.

If you choose to publically operate your business under a trading name (rather than using your personal name), you should register your chosen business name with ASIC. Furthermore, if you want to have exclusive right to use that business name because it is crucial to your brand, you should register the name as a trade mark with IP Australia.

Tax Considerations

You should be aware of the tax consequences of setting up as a sole trader. For example:

  • the profits of the business are treated as personal income, so you must report the business income you earn (after expenses) and pay income tax using your personal TFN;
  • you pay the same tax as any other individual; and
  • you are entitled to the tax-free threshold if you are an Australian resident.

In addition, you are responsible for your superannuation arrangements. You may be able to claim a deduction for personal superannuation contributions and you must make superannuation contributions for eligible workers you employ.

What Are the Advantages of Operating as a Sole Trader?

Setting up as a sole trader is very common for people starting a small business. This is because it is by far the simplest and cheapest business structure to establish.

Some other advantages of operating as a sole trader are that:

  • it is straightforward and inexpensive to set up because there are few legal and tax issues;
  • you have complete ownership, control and management of the business so you have the freedom to run the business as you wish without the interference of other business partners;
  • there are no specific regulations which apply to sole traders which means that the reporting requirements are minimal;
  • you keep any profits of the business after tax as well as any money you’ve gained after tax if you sell the business;
  • tax losses may be offset against any other income you earn (subject only to certain non-commercial loss rules); and
  • as an individual, you are eligible for the 50% capital gains tax discount on the money you’ve gained from the sale of a capital asset (such as the goodwill component of a business sale) that you have held for at least 12 months.

What Are the Disadvantages?

Operating as a sole trader can be very appealing to those starting out. However, it is important to bear in mind the disadvantages of operating as a sole trader. For example:

  • you are legally and financially responsible for all aspects of the business, so your personal assets are at risk if there is debt or liability;
  • you cannot share debts and losses with other business partners;
  • there is limited capacity for growth as you cannot take on other business partners or co-founders;
  • when trying to raise capital for your business, you are not able to offer a share of your business to investors. This means that you will need to seek financing from lenders such as banks;
  • your tax liability increases the more income your business makes and you cannot access flat tax rates such as those enjoyed by companies;
  • there is no flexibility when planning your tax as all business income is treated the same as your personal income;
  • it is more difficult to change ownership when selling the business because valuable assets such as goodwill are inseparable from you as an individual; and
  • you may miss the ability to share ideas and concerns that you can do when running a business with others.

What Are Other Business Structure Options?

There are two common alternatives to operating as a sole trader:

1. Forming a Partnership With Others

In a partnership, all partners own the business and its assets jointly. It also means that the partners are equally responsible for debts. Therefore, there is scope to share profits and losses with others involved in the running of the business.

2. Creating a Company

A company is a separate legal entity from you and is regulated by ASIC. This separation gives you an extra level of flexibility in:

  • managing your business affairs;
  • distributing profits; and
  • protecting your assets.

It also reduces your personal responsibility for business debts and other liabilities.

Key Takeaways

Operating as a sole trader can be an attractive business structure because of the flexibility and low administration and set up costs. However, it is important to bear in mind the disadvantages, in particular the difficulties you can face, such as:

  • trying to grow and expand the business;
  • raising finance; and
  • the risk of personal liability for debts of the business.

If you would like help determining whether operating as a sole trader is the best structure for your business, you can contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.


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